Thursday, August 14, 2008

The Reserve Bank has challenged Australia’s private banks to pass on in full the coming 0.25% to 0.5% cut in official interest rates, declaring that they are highly profitable and that their cost of funds is diving.

The challenge comes as two of Australia’s largest banks, Westpac and St George, received approval for a merger that will create Australia's biggest mortgage lender.

The Reserve Bank’s Assistant Governor (Financial System) Philip Lowe told a conference in Sydney that Australia’s banks were “highly profitable by international standards” and that the big five banks were making double what they did five years ago.

Amongst the 100 biggest banks in the world, there were “less than a handful with higher credit ratings than those of the large Australian banks”...
In recent months they had increased mortgage rates by around 0.55 percentage points more than the Reserve Bank had increased its cash rate, a decision they had justified by pointing to extra increases in their cost of funds.

But the 90-day bank bill rate, “often used as an indicator of the bank’s marginal costs of funds” had fallen sharply in recent weeks.

"I think over the last two or three weeks the 90-day bill rate has down around half a per cent,” Dr Lowe told the conference.

"That means that there is no obvious reason that the banks could not pass through any change in the cash rate."

The Reserve Bank is understood to believe that as much of half of the bank’s mortgages are funded from deposits and other assets whose costs closely match the 90-day bank bill rate. A 0.50 percentage point drop in those costs should allow the banks to cut mortgage rates by at least 0.25 percentage points.

In his presentation the Assistant Governor warned that any widening of their margins risked “raising the ire of the public.”

In Perth the Prime Minister backed up the Reserve Bank’s assessment declaring that the banks had had a responsibility to pass on to their customers the expected cut in professional rates.

“I am all for our companies being profitable, that is part and parcel of a market economy. But if you are a bank generating significant profits - and the commercial banks have been generating significant profits in recent years - those banks owe it to working Australians who are under financial pressure, that when official interest rates move that those moves should be passed on to consumers.”

Announcing a 7% jump in its annual profits the Commonwealth Bank rejected the Prime Minister’s plea declaring that it was unable to guarantee that it would pass on the next interest rate cut in full.

The Bank’s Chief Executive Ralph Norris he could not “speculate at this point on obviously a speculative cut by the Reserve Bank.”

“Obviously at that point we will assess what our average cost of funds is and obviously a cut will have some impact on that, and it is a matter of assessing exactly what that cut is,” he said.